Conventional Wisdom: Overturned

As conventional real estate wisdom has it, sellers should “wait until spring to list your house because there are no buyers during the winter.” Perhaps that was true at one time. If it was, it is no longer. Realtor.com just released a survey of winter buyers that was conducted last month and which shows some very different information. Here’s what they said…

-          When asked about the biggest challenges when searching for a home during winter, the most common answers were that there is not enough inventory within their price range (45 percent of respondents), and that there is not enough inventory on the market (34 percent). The biggest complaint was that there are not enough homes for sale.

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-          Among the top reasons consumers are looking to buy a home in winter? 24 percent revealed that they were unable to buy a house during spring or summer. The truth is, there weren’t enough homes for sale this spring and summer to satisfy demand. These buyers wanted to be in their next home by now and are way behind schedule. How would you rate their motivation?

-          If that’s not enough to make you reconsider waiting until spring, consider that 19 percent of those surveyed are planning to purchase this winter using all cash.

What we have then is a lot of buyers who couldn’t find a home during spring or summer, who are complaining there are not enough homes for sale during the winter, and a fifth of them are cash buyers. So if you’re considering selling soon, when would be a good time to do it? Probably right about… now.

Getting Your Offer Accepted

As Bob Dylan, said, “The times, they are changin’.” Not too long ago, advice on this topic wouldn’t have been necessary. Since the beginning of this year, however, one of the biggest challenges buyers have faced is wrapping their heads around the fact that they don’t call the shots anymore. Inventory is way down across the board, and for the first time in a long time there are more buyers than sellers. So landing a great deal takes a bit more effort than it has in recent years.

As a buyer, there are certain things you seek in a home. Your needs are unique, but the general characteristics that make a home appealing within a particular area or price range are almost universal amongst buyers. That means you’ve got competition. More and more, well-priced listings are attracting multiple offers within days after hitting the market, and they’re selling for sometimes far in excess of the seller’s asking price. Even without multiple offers on the table, sellers of well-priced listings know if any given offer isn’t all that attractive, they can simply wait for the next one which should be arriving shortly. The seller has their pick of buyers, and it’s up to you to convince them you’re the one!

What sellers are looking for is NOT just the highest possible price, though – they’re looking for the best possible price with the highest likelihood of closing. So what can you do to make your offer more attractive than others?

 Price. Although price isn’t the only concern, it’s still the primary one. Offer high enough, and the other considerations fade out as dollar signs enter the sellers’ eyes.

Financing. Plain and simple, cash is king. Sellers frequently accept lower cash offers because their likelihood of closing is much higher than that of a financed offer. If you don’t have enough cash available, consider such creative methods as 401(k) loans, private mortgages (i.e. to a family member), or for investors, hard money. If you must finance, then use the strongest financing you can qualify for. In order, that would be:

a.       Conventional with 20% or more down

b.      Conventional with less than 20% down

c.       FHA with 10% or more down

d.      FHA with less than 10% down

e.       Rehab loan, such as FHA 203(k)

           Time. Typically, sellers list their homes when they’re ready to sell them. (Duh, right?) So the faster you can close, the faster they can move on with their lives. If you’re buying cash, you can probably close within two weeks. With conventional financing you can shoot for 30 days, and with FHA you’re looking at 30-45. Rehab loans take a minimum of 60 days and can easily drag on for much longer.

      Contingencies. The fewer contingencies, the better. Attorney review and inspection contingencies are built into the contract, but that doesn’t mean they can’t be waived/eliminated. If you must finance the purchase, then you must include a financing contingency – there’s no way around that. A sale of home contingency (you have to sell your house in order to buy the next one) significantly weakens your offer by extending the time frame and introducing a large amount of uncertainty. If you’re competing with other offers and you are contingent-on-sale, you’re very unlikely to win.

       Incentives. Additional personal property, closing cost credits, seller-paid points, home warranties, high tax prorations, pre-closing possession… These are just some of the “perks” buyers can, and frequently have, requested when making offers over the last few years. On top of nickel-and-diming the sellers with these items, they complicate the presentation of the offer. Author Les Brown said, “Shoot for moon. Even if you miss, you’ll land among the stars.” Sorry Les, but in this market if you shoot for the moon as a buyer you’ll likely just end up by yourself in outer space. Keep the perks to a minimum if you want the best price, or to get the house at all.

      Heart strings. Most sellers are human beings, and most human beings have emotions. In some instances, it can work in your favor to submit a “personal letter” to the seller to demonstrate why you love their home and how you’ll take great care of it for many years. When to include a personal letter is a topic for another day!

Here’s the rule of negotiations, of which I’m sure Yogi Berra would approve: Everything other than price costs money. Handing a briefcase full of cash to the seller on the spot is the surest, fastest way to complete the sale, and if you could do that, you would get the house for the absolute lowest price possible (although it’s probably not a great idea for other reasons). Anything beyond that – each extra step, each contingency, each week that must pass before closing, each nugget of uncertainty – must be accompanied by a higher price to compensate the seller for the additional risk. On the opposite end of the spectrum from the briefcase-full-of-cash buyer is the buyer who makes an offer contingent-on-sale, financed with a 203(k) rehab loan, a 90-day closing, and throw in the 1976 Eldorado that’s in the garage. This buyer would have to pay dearly in order for their offer to even be considered.

Keep these considerations in mind when you’re thinking about how to structure an offer. Better yet, hire an agent who can advise you as to how much you can ask for on any given listing while still getting a house you’ll love for the best possible price.

Are Reverse Mortgages Only for Idiots?

There are certain everyday terms that never killed anyone but have become expletives in the wake of the financial collapse. Included are ARMs (adjustable rate mortgages), sub-prime, credit default swaps, and, probably to a lesser extent, reverse mortgages. "Reverse mortgage" sounds like an easy way for something bad to happen to your house. But despite the bad name, they can actually be a very wise financial decision - of course, depending on the circumstances of the borrower in question.

A reverse mortgage is an FHA-insured loan, officially called a Home Equity Conversion Mortgage (HECM). (And yes, it is pronounced, "heckem.") The basics are here, but as usual, I'm going to be a nice guy and tell you what you really need to know, right here.

When you buy a home with a typical mortgage (referred to in this context as a "forward" mortgage), you put down a certain amount of money - let's say 10% - and finance the rest over some time, usually 30 years. You have a monthly payment that includes principal, interest, mortgage insurance, property taxes, and homeowners insurance. You pay on that loan until it's paid off, or more likely until you refinance, sell the house, or die. After all, the term "mortgage" is a blend of the Latin roots "mort" (dead) and "gage" (pledge).

The first manner in which I will blow your mind is to tell you that you can actually BUY a house using a reverse mortgage. I admit, I did not know this myself until just recently. I thought reverse mortgages were for very old people who owned their house outright and wanted or needed to access the equity. And although that is still part of the picture, since I'm a real estate broker I am fixating on the ability to purchase a home using a reverse mortgage.

A reverse mortgage works the opposite way from a forward mortgage (but you knew that). Simply put, the borrower makes a down payment - larger than what most people are putting down these days on forward mortgages - closes on the house, and does not make any mortgage payments whatsoever for the remainder of the time they live in the house. The benefit here is pretty obvious - the borrower doesn't have to make a mortgage payment, ever. At this point many readers will think, "But the mortgage balance grows because they're not making payments!" It's true. The interest that normally would be paid monthly instead accrues and is capitalized (added to the principal balance of the loan). On a $200,000 loan, at 4.5% interest, that's $750/mo. Today's reverse mortgage interest rates are slightly higher (and also unrelated, tied to different indices, and much more stable) than forward mortgage rates, clocking in at 4.00-4.50%. So the fear is that the mortgage balance grows too much, too fast, creating a negative equity or "underwater" situation, right?

Time for an example to illustrate why that's less of a problem than you might think, which will result in a second blowing of your mind. Let's say Bertha is a 70-year old widow, living on a fixed income consisting only of social security. Bertha, like most human beings, likes to eat good food, spend time with the family, maybe go somewhere warm every now and then. And of course she has regular bills to pay, like insurance, prescriptions, cable, that good old land line, and her riverboat allowance. Well, with increasing cost of living, Bertha ain't doing so well anymore - the grandkids are getting $5 bills for their birthdays as opposed to the customary $10, and the penny slots are the only thing at the casino seeing any action.

(I'm still working on blowing your mind again, this point just takes awhile to develop. Hang in there.)

So let's say Bertha buys a house. Why, you ask? Well, Bertha had to get double knee replacement surgery, and her tri-level home won't cut it anymore, so she has to get a ranch. So anyways, let's say Bertha buys a house. Let's say Bertha buys a house for $300,000. Let's say Bertha buys a house for $300,000 and puts $100,000 down. So here's Bertha with a $200,000 mortgage to pay, on top of all the aforementioned expenditures. She's coughing up $900/mo for principal and interest (assuming 3.5% interest), not even counting property taxes or homeowners insurance. Not looking real good for Bertha, or the casino, or the birthday cards.

Alternatively, let's say Bertha buys a house for $300,000, puts $100,000 down, and gets a reverse mortgage. She still owes $200,000, but she has no mortgage payment. As she's told you a thousand times by now, she's 70 years old and she's earned it, so why shouldn't she be able to enjoy it? Her mortgage interest is capitalized at a rate of $750/mo (assuming 4.5% interest), and she lives out the autumn of her years, giving out full $10 birthday cards and playing only the newest of the new slot machines, until she fulfills her life expectancy of 81. At that time, her mortgage balance has grown by $126,500 (4.5% annual interest and 1.25% annual FHA mortgage insurance for 11 years). During the same 11-year period, with a traditional mortgage she would have made principal and interest payments totaling over $118,000. So in the end, it cost her a few thousand more. But the difference is the $118,000 Bertha did NOT spend on mortgage payments while she was still here, that was instead spent on enjoying what she's worked her whole life to enjoy.

And here's where I arrive at the mind-blow: By this point, the house might be worth $400,000. The family/estate inherits the house, sells it for $400,000, pays off the $326,500 mortgage, and keeps the  proceeds. Just to be clear: If there is equity, nobody steals it. It belongs to the owner, and/or their estate. Sure, it may not be much, definitely not as much as if she'd have gotten a forward mortgage, but what would any decent son or daughter want - more money for themselves upon their mother's death, or more money for her during her life?

Final mind-blow: If this story happened to take place in a declining real estate market - I mean, purely hypothetically speaking, because we've never seen anything like that - and the home's value fell from $300,000 to $200,000 while the mortgage grows to $326,500... Assuming the family/estate doesn't want the house, the bank takes title to the property, appraises it and sells it, FHA chunks in the negative equity ($126,500) to cover the difference, and the family/estate is off the hook. That's the beauty: Reverse mortgages are non-recourse loans. They are secured ONLY against the subject real estate, without the ability to pursue any other income or assets, and they're insured by FHA to account for the risk that the principal balance accrues faster than the home's value.

It's definitely not a product for everyone, but in certain situations a reverse mortgage could be a real quality-of-life-saver. Some of the less interesting but nevertheless pertinent facts are:
- Only senior citizens (age 62 or older) can obtain a reverse mortgage. Most people who get one are 70 or older.
- Required down payment amounts vary with age - the younger you are, you more you have to put down - but will not be lower than 15% or higher than 50%.
- Just like with forward FHA loans, there is an upfront mortgage insurance premium charged at the closing in addition to the monthly/annual mortgage insurance premium. For reverse mortgages, the upfront MIP is 2% of the loan amount and can be financed into the loan.
- There are currently no credit or income requirements, although some will go into effect this fall. They will be much looser requirements than what is expected in order to obtain a forward mortgage, so seniors on fixed incomes who might have difficulty qualifying for a forward mortgage can still obtain a reverse mortgage much more easily.
- There are other reverse mortgage programs available, outside of the fixed "Standard/Saver" program I've outlined here, which involve lines of credit, benefits from an increasing interest rate environment, etc.

In the end, the benefit is that your family member or loved one may be able to live the last years of their life more happily, or use a reverse mortgage to buy into a supportive, adult community that may not otherwise be affordable for them. And for an elderly person with no children (or only worthless, irresponsible children to whom they would never leave their estate), a reverse mortgage is a no-brainer.

Back to that question about reverse mortgages and idiots, though... Nope. They can be a great decision and in many instances are recommended by financial advisors and estate planners. If it sounds like a consideration for anyone in your family, let me know and I can put you in touch with someone who specializes in these.

Are We in a Seller's Market??

Buyer's market, seller's market... Chances are, you've heard lots of people throwing these terms around without anyone within earshot actually knowing what they mean. Sure, in the general sense, a buyer's market is good for buyers and a seller's market good for seller's. But how, why, and what the hell does it actually mean? Now, I can't define these terms if you're curious about the market for methamphetamines, but if you're talking real estate, I've got you covered.

In the most general sense, for any product or service, one side's market is when there are more people on the other side of the fence than on your side. So a seller's market is when there are more buyers than there are sellers, which means a few things:
- Buyers have fewer choices
- Buyers run into each other more frequently, creating increased competition
- Due to the first two points, buyers find themselves making higher/better offers for any product that substantially meets their requirements, in order to beat out the competition and because there isn't much else to choose from. At the same time, sellers see this happening and price their products higher. These forces result in price increases. Swap the scenarios in this paragraph to envision a  buyer's market.

Ok, now back it up for a second. In order to define buyer's vs. seller's markets in real estate I have to offer a quick lesson in applied math, but I promise I'll keep it short! One of the useful measurements of a market is the absorption rate, which tells us how many homes are selling each month (the number of homes sold over a certain number of months, divided by the number of months). For example, in the past three months in Joliet, 243 homes were sold. So the absorption rate in Joliet over the past three months is 243 / 3 = 81, which means on average 81 homes sell each month. By itself this is not a great indicator of a market, because in Steger there are not even 81 homes available for sale. So to make the absorption rate mean something, we have to factor in the size of the area by dividing the absorption rate into the number of homes that are currently for sale in that area. For example, take Joliet's 577 homes currently for sale and divide it by the absorption rate of 81, and you end up with 7.12. So what is 7.12? We call that the number of months of housing supply. In other words, if no more homes came on the market and homes continued to sell at the current pace, how many months would it take for all of today's inventory to sell? In this case, a little over seven months.

Your next question might be, what does this geeky measurement mean for someone who doesn't care about real estate math? In general, a seller's market is one in which there is less than six months of housing supply, and a buyer's market is one in which there is more than six months of housing supply. (If you're into riding the fence, six months of supply would make it a "balanced market.") Joliet's 7.12 months of supply indicates a market that is mostly balanced but slightly in favor of buyers. And even though in Steger only 28 homes have sold in the past three months, when you divide that into the total active inventory of 65 homes you see there arr 6.96 months of supply in Steger - practically the same as in Joliet.

A few years ago, when the market was in free-fall, in most suburbs there 20+ months of supply. As of the last three months or so, I rarely see them over 10. In one neighborhood in far northwestern Joliet (Greywall Club), where I have a listing that is under contract and ready to close on Friday, the market is like I've never seen it. In the past six months, 12 homes have sold and another 12 are under contract, but only one is available. Take the 12 sold divided by the six-month time period and you get an absorption rate of  2, meaning 2 homes sell each month in this neighborhood. Divide the single active listing by the absorption rate of 2, and you get one-half of one month of housing supply. That's a seller's market to the extreme. And the 12 pending sales show this number won't be going up anytime soon. Case in point: When I listed that home, on my recommendation my client priced her home at the same amount as one down the street which was under contract but was slightly larger and a few years newer. We had a signed contract in less than 30 days for 95% of her asking price. The numbers indicated this neighborhood was in high demand and short supply, and the theory proved true - this sale is rock-solid evidence that prices in that neighborhood are on the rise.

That's not the only place where prices are finally starting to rise, though. Unfortunately, the Chicagoland area is the last major metropolitan area to turn the corner of the housing rebound, but maybe we were just carrying the nation's weight on our broad shoulders. In any event, check out the following data.

MS = Months of supply (remember, <6 = seller's market, >6 = buyer's market)
Median = Median home sale price
'12/'13 = Data covering the three months leading up to 6/3/12 or 6/3/13

                        MS'12   MS'13   % change     Median'12   Median'13    % change
Richton Park    10.44    4.94        -53%             $60,657      $95,000       +57%
Matteson          11.31    5.90        -48%           $124,500    $115,000         -8%
Homewood      10.00    4.98        -50%           $116,800    $130,000       +11%
Orland Park       9.46    7.78        -18%           $258,000    $275,000         +7%
Tinley Park        9.62     6.72        -30%           $210,500    $205,000         -3%
New Lenox       11.17   7.84        -30%           $255,000    $242,200         -5%

The most positive change has been in Richton Park, where since one year ago the months of supply have dropped to half of their year-ago number and the median sale price has increased by a whopping 57%. In all of the areas surveyed, months of supply are significantly less than compared to one year ago. And in three of the areas, median prices have already begun to rise. It's no coincidence that two of the three areas that have experienced the biggest drop in supply have also experience the largest price increases. The others will soon follow.

Back to the question, then, about whether this is a seller's market. Real estate markets are extremely localized, so I never like to paint with broad strokes, but in some areas, yes, this is a seller's market. In other areas where it is still leaning towards buyers, it doesn't appear things will remain that way for long.

Congratulations, we're getting out of this mess.

What's the best place to find information on homes for sale?

To say there are a lot of real estate websites is like saying there are a lot of grains of sand on North Avenue Beach. How do you tell the difference, and how do you know you're not wasting your time or being misled with bad information?

Probably the first big consumer RE website to pop up was Zillow. Zillow got big by tantalizing everyone with a "Zestimate," an automated value of their home, during a time when everyone in the nation just could not get enough of seeing the value of their home. (Whether that "Zestimate" or any other automated value calculator is worth the pixels it occupies on your screen is a topic for a different post.) Those days passed, to put it lightly, and at some point Trulia became the next rising star. Based on inquiries from my web advertising, Trulia is probably tied for the most popular consumer RE website at this time. Realtor.com is the other top competitor.

So what's good about these websites, and why are they so popular? Simply put, they have attempted (and on some levels succeeded) in making themselves a "one-stop shop" for real estate needs. Not only can people view homes for sale and recently sold, but they can find information about real estate agents, school districts, crime data, mortgages, and other info that people buying or selling would like to see.

If I ask you to think of an example of a "one-stop shop" for any other product or service, likely one of the most popular answers would be Walmart. Walmart is the epitome of one-stop shop, and it holds a lot of value to meet many needs. If you're looking to shop for a wide variety of items in the same place, nothing beats it. Where else can you check out with a cart containing a vacuum, jeans, a garden hoe, an iPod, prescription ointment for that rash, a gun, a kitchen sink and a gallon of milk? Definitely nowhere but Walmart. If you're looking for a set of golf clubs, you could absolutely throw a set in the cart at Walmart while you're there checking off the rest of that list. But if you're really interested in getting a good set of golf clubs, clubs that will provide a good value and will be durable, accurate, and comfortable, are you really doing well for yourself by conducting your search at Walmart?

The one gap that consumer RE websites will never be able to close is the completeness, real-time pace, and most importantly the objectivity of housing data found in your local multiple listing service (MLS). Think about it: All of these consumer RE websites are free. They're paid for by a barrage of advertising that hits you like a Foot Locker salesman at the mall. Ads fill every side of the screen. Advertising dollars skew which search results you see and the order in which you see them. Advertising dollars put an agent's face next to a listing that may not be theirs, even though the impression is that it is, so you aren't really contacting the person you think you are. And properties are advertised while they're under contract, even though they're no longer available, because the agents whose advertising dollars fund the site want as many leads as possible.

As a matter of full disclosure, I pay for Enhanced Listing status for all my listings on Trulia. It may not be the most objective source of information, but if I intend to do the best job for my sellers I have to do everything possible to make their listings stand out in the fray.

In order to gain direct access to your local MLS (your agent can set up a client access account for you), not only must you hold an active real estate license, but you must be a member in good standing of the local real estate board (here, over $400/yr), and pay more fees ($340/yr right now) for MLS access. It's exclusive, it's expensive, but it's the best. Here's why:

- Completeness of information. All the info you see on consumer RE websites and then some. Photos, tax and assessment info, room sizes and floor coverings, detailed lists of equipment/amenities, school district maps and info, governing body maps, flood plain maps, down payment assistance information, sale history, "walkability" ratings, virtual tours, open house scheduling... You get the point. Your agent can also build a recurring search for you with a level of precision that far exceeds the search capabilities of the consumer RE websites. In your MLS search I can exclude short sales, require a master bath, cap taxes at a certain amount, or freehand an area on the map where you want to live. On consumer websites, you can search by bedrooms, bathrooms, and price, and that's about it.

- Real-time information. What defines the moment when the real estate community is notified of a new listing? When it goes live in the MLS. The moment the listing agent clicks the proverbial red button, the listing pops up on other agents' screens and in all client searches whose criteria the property meets. Instantly. But Realtor.com and Trulia.com won't display the new listing info and photos for another 24-72 hours. In today's market, if a hot listing hit the market 72 hours ago, you may already be too late. The same thing happens when a property goes under contract. My clients know the minute a listing is marked "under contract" because it either shows up as such the moment the listing agent clicks the button, or it disappears from their page (depending on their preference). The status won't change on the consumer websites for 24-72 hours, and once it does, you'll have to really look for the tag to determine it's no longer available.

- Objectivity of information. This may be the most important. Our local MLS rules state that nothing in the listing description or photos can indicate who the listing company or agent is. There are watchdogs on patrol to locate errors or falsifications, and agents can incur fines if such errors are not corrected. There is no advertising, no manipulation of the order in which search results are displayed, no different status of any kind conferred on any listings. Thus, you can compare listings apples-to-apples, and do it in peace without interruption from advertising messages.

Browse all you want if you're just curious or you really get a kick out of looking at pictures of houses, but when it comes time to start considering selling or buying a valuable asset, the first matter of shopping you need to take care of is finding a good real estate agent. They can set you up with a client account on MLS, which will save you a lot of time and should go a long way towards establishing your peace of mind.